Market Rallies Getting Weaker and Weaker

As I have often mentioned in the past, I try to work in probabilities and then plan accordingly with my investing and trading. I look at Elliott Waves, Fibonacci levels, oversold and overbought patterns, cycles, and other indicators to give me some clues. Today, we look at an indicator called the force index.

The Force Index

Developed by Dr. Alexander Elder, the force index combines price movements and volume to measure the strength of bulls and bears in the market. The raw index is rather erratic, and better results are achieved by smoothing with a two- or 13-day exponential moving average (EMA).

The higher the positive reading on the force index, the stronger the bulls power

Deep negative values signal that the bears are very strong

If the force index flattens out, it indicates that either (1) volumes are falling, or (2) large volumes have failed to significantly move prices. Both are likely to precede a reversal.

That last explanation is important because we may be under that type of condition. Below are two charts, one with the S&P 500 and the other the NYSE composite index. Recently, the NYSE composite has managed a light 45% retracement of the January/February decline, whereas the S&P 500 has managed a stronger 67% retracement of the prior decline.

Some have surmised the S&P futures are being manipulated most every Monday morning by strange and heavy futures buying in pre-market trading. Twenty-two of the last 25 weeks, this has been the case, yet the overall internals of the market are not showing as being very strong if you look at the force index. They especially show up weak if you view the larger NYSE composite index, which would be much harder to “paint” as it were.

SP 500 Weekly Chart

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My point on these charts is to look at the brown color for the force index as it relates to the market movements over several months. As that brown graph gets weaker with each rally, it means the bulls have less and less power, volume, and money pushing the market higher. Most recently, this last market rally has been the weakest in months according to the force index indicator, and again, helps to provide me with clues that a ‘C’ wave down is still due.

NYSE Composite Chart - Daily Chart

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This may help you understand my near-term apprehension on the broader markets and why we have positioned or recommended positioning in the ETFs EDZ and/or TZA. The market may bounce a bit higher early in the week to complete the zig-zag bounce from the February lows, but I expect a retest of the January/February lows to commence. If I’m wrong, it won’t be the first time nor the last!